10/19/22 04:16 PM EDT

REITS DAILY BRIEF | NOTES FROM PLD'S 3Q + SUDDEN MAA CHANGE | 10.19.22 (PLD, MAA, MPW)

Rob Simone, CFA

@HedgeyeREITs

Takeaway: And then of course... MPW, where an IG credit is closing hospitals. Its the gift that keeps on giving!

Hedgeye Cartoon of the Day: Empty Punchbowl

It is 10.19.22, and Active Short MPW is overvalued by approximately ~$11/share.

Ticker: PLD

Company Prologis, Inc.

Subsector: Industrial / Logistics

Headline: Notes from 3Q call

~$0.57/share of net promote income came in below the ~$0.60/share outlook (to be recognized mostly in 3Q) on a ~5% write-down of European asset values, partially offset by favorable debt mark-to-market. On our model much of the delta was driven by unrealized FX gains in the "Interest & Other Income" line, which we are going to start modeling out explicitly in addition to the realized portion to derive a "cleaner" number.
Rent change on signings was +84% in the quarter and mark-to-market now stands at +62% (vs. ~56% as of the end of 2Q).
Following the Duke closing, ~87% of PLD's NOI will be generated in the U.S.
Regarding supply, current projections are for a gap between supply/demand to perhaps emerge in late-2023/early-2024.
2022 market rent growth forecast: Global +26% (up from +10% initially) and U.S. +28% (up from +10% initially).
4Q development starts will be ~60% build-to-suit, so a more defensive posture for sure. We like the curtailing of capital deployment on the margin, which we think was somewhat of an "unforced error" for PLD at the top of the cycle in late-2021/early-2022 with DRE.
Finally as we mentioned on the call this morning, while PLD is conservatively levered and has no funding issues whatsoever, doubling of net usage of cash from ~$2 billion to ~$4 billion in just one quarter really speaks to how quickly the transaction markets have deteriorated (as it relates to contributions in PLD's case). Redemptions from Strategic Capital grew by ~$1.3 billion or ~3% of open-end third-party AUM.
We are going to spend time properly incorporating DRE into our model post-close of the merger.

Ticker: MAA

Company Names: Active Short Mid-America Apartments

Subsector: Apartments

Headline: Surprise intra-day management change announcement

Active Short MAA announced the retirement of COO Thomas Grimes effective 12.31.22.
Intra-day announcements of management changes are always odd, and this one appears very sudden, candidly. Its better to announce these shifts during non-market hours.
Certain investors have voiced to us a concern of "lack of bench depth" for both MAA and CPT. We think this is ill-timed heading into a non-consensus slowdown for MAA, apartments and residential broadly, when property and asset management will be of increased importance.
Of note, there is still no update from MAA on any Hurricane Ian impacts.

Ticker: MPW

Company Names: Active Short Medical Properties (Dis)Trust

Subsector: NNN Hospitals

Headline: #'s 3 & 4 of original 7 St. Luke's Hospitals (2019 deal) set to close

Yesterday Kansas City, Mo.-based St. Luke's Health System ("SLHS"), which is one of MPW's only investment-grade credits in our view, announced that it plans to close two locations in Olathe and Shawnee, KS.
This would mean that 4 of 7 locations from the 2019 deal will have now closed. The system will close inpatient services in the near-term and the ER's will remain open until 12.31.22. No exact date was provided for inpatient.
The system closed two other community hospitals, both located in Overland Park, KS, in 2020.
Recall that MPW paid ~$145.4 million for these 7 community hospitals on 6.10.19. The properties were leased to SLHS pursuant to 7 individual leases all guaranteed by SLHS. SLHS will keep paying, but we believe MPW paid a sub-6% cap rate and the value today on these 4 locations would be much lower if these locations are "dark." Like most other MPW deals, particularly since 2016, our view is that MPW overpaid.
As a reminder, MPW had set a ~$1 billion target for 2019 acquisition activity and a ~$3 billion target for 3-year activity ending 2021, which contributed to max performance-based equity award payout thresholds for NEOs. We believe including a dollar-based acquisition target is a perverse incentive that spurs MPW management to pay the highest price.